Learn to think like an economist is within everyone’s reach and there are ideas and concepts that Economics can help to clarify in terms of personal finances. In addition to teaching us to see the world from a different perspective, it can support the development of important savings strategies.
Thus, economics studies the way how we act and make decisions about the use of resources. This science starts from assumptions, theories and economic principles that economists use to draw conclusions and make predictions.
In this article, we have gathered some “perspectives” through which an economist’s thinking goes so that he can make better financial decisions in his day-to-day.
1. Everything has a value and that value is subjective
In Economics, “there are no free lunches”. That is, everything has a value even what we don’t pay for. And to think like an economist too should not confuse value with price or cost. There are three different concepts. In fact, value is a subjective and very personal concept. It is related to the importance we attach to things, or rather, to resources that can benefit us. But not all of us recognize the same value for everything and the same thing will certainly have different values for different people. It all depends on our preferences, it can vary with age, culture and way of life.
Although the great motivation of the human being to act is how much it will benefit him, it is important to realize that we don’t all value things the same. For example, let’s say a pen is priced at 20 euros. Objectively it costs 20 euros, but for you it may be worth more or less than for someone else. So we make different decisions and we don’t all have the same priorities. Not everyone will accept to buy the pen for 20 euros because they may prefer to buy a cheaper pen if they really need it. Others may be collectors, like the color, brand or shape and even consider it to be of superior value. The idea that everything has a personal and non-transferable value is known as the “subjective theory of value”.
2. Cost and price are different things
Price and cost are different concepts.. Even what tends to be free like health and education has a cost. While you don’t have to pay for these services, the cost is borne by our taxes. That is, for a portion of the salary that is withheld for the IRS.
Cost in savings means what you stop consuming or what you sacrifice. For example, to go see the last movie that opened at the cinema, you need to pay a ticket of eight euros. With those eight euros you could have a drink, eat ice cream, visit an exhibition or save money to buy a new piece of clothing. Therefore, the cost of going to the cinema was the drink, the ice cream, the exposure that you didn’t go to for the same 8 euros.
But the cost can also mean time. For example, going to the doctor or having surgery in the public sector may not involve paying money, but it can cost you time. You may have to be on a waiting list. In short, not everything has a price (monetary), but everything has a cost.
3. Sunk costs: costs you won’t recover
“There’s no use crying over spilled milk.” This popular popular expression will teach you to think like an economist. It means that what’s done is done. The sunk costs or, in English, sunk costs. are those costs that are sunk, so what you have to do is accept them and forget about them. The only costs that should be considered in our decisions are the “future opportunity costs”.
Past costs are “sunken”. Let’s go back to the example of cinema. We spent 8 or 12 euros to watch a three-hour movie with our favorite actor. But we realized in the first hour that the film is a flop. We feel like we are wasting time. However, no one will refund the ticket money to us. Therefore, it is not worth thinking about that lost money.
4. Opportunity cost: decisions are not by chance
We keep talking about costs, decisions and opportunities. Why thinking like an economist requires making choices. In order to be able to choose, we consider different alternatives that bring us different levels of compensation or benefits. For example, if I choose to spend all my salary and not save a part, in the future I will not have saved for the future. That is, the opportunity cost of spending everything I earn is not being able to have other, more valuable goods in the future.
Economists link the concept of opportunity cost with the marginal benefit of one choice over another. That is, which decision will benefit me the most? After all, what we all want, either individually or as a society, is to increase our well-being or, if you prefer, our happiness.
Also read: Question for 1 million: How much does it cost to be happy?
5. Tradeoffs: the difficult task of choosing
We already know that thinking like an economist means making decisions as balanced as possible. This is because there are tradeoffs (which we can translate as “exchanges”) and these vary between efficiency and equity. We cannot have maximum levels of both. Choosing more efficiency in the application of resources may imply reducing equity in their distribution. How to choose? This choice will always be influenced by our values and culture. But it is possible to introduce a certain amount of balance here if we work “on a razor’s edge”. That is, if we look at the marginal benefit and marginal cost of each action.
Marginal means the additional or extra unit. Every time we make a decision it is as if we are calculating the marginal benefit (the benefit of one more unit) and the marginal cost (what would be spent to acquire one more unit) of the action. The economic way of thinking says something must be done until the marginal benefit equals marginal cost.
6. Comparative advantage: produce more or even at less cost
absolute advantage and comparative advantage are essential concepts for thinking like an economist and making intelligent, rational decisions. This is where all other concepts such as opportunity cost and marginal costs and benefits come in. In commercial exchanges between different regions or countries, it is essential to know what each one is best at. Then he trades with others and manages to get what he needs with less effort, less cost and more efficiency than if he produced everything he needs.
But let’s go by parts. Absolute advantage means being able to produce more than another with the same amount of resources. Instead, it may also be the case that you are able to use fewer resources to produce a given quantity. There are several factors that can contribute to a region or country being at an advantage over others. It can be climatic, cultural, natural resources, qualified human resources.
Already comparative advantage means being able to do something at a lower opportunity cost than another.
As there is always an opportunity cost when doing something, it is sometimes advantageous to pay someone to do something even if we have the knowledge and skills to do it. In other words, just because we are able to produce or do certain work does not mean that we should. Being that time is also a resource.
Also read: Financial proverbs: what do popular sayings say about money?
7. Invisible costs: you don’t see them, but they are there
Iintentions and results are not always the same. Thinking like an economist requires you to consider the possible consequences (which may include costs) of your actions and attitudes, even those that are unintended. In fact, just because something sounds good or feels right doesn’t mean that a certain goal will be achieved or that, even if it is achieved, collateral damage will not occur. These “damages” are called invisible costs. These are unnoticed expenses that are not objectively accounted for.
In a company, invisible costs can with regard to creativity, effective meetings, harmony between employees, staff turnover and can compromise the respective financial performance. These costs do not appear in budgets and tend not to be analyzed. Therefore, they are not planned or controlled.
Already domestic life these invisible costs too are present, for example, in their consumption decisions.
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